Panel Paper: Managing Fiscal Distress: Political Cost and Effectiveness of Budget Gap-Closing Strategies

Saturday, November 10, 2012 : 1:45 PM
Jefferson (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Milena Neshkova and Hai Guo, Florida International University

The optimal fiscal responses of state and local governments to the business cycle have long been the focus of both scholars and practitioners. The local government, being the closest level of government to taxpayers, is more fiscally volatile to economic changes. The recent economic recession forced U.S. local governments to deploy a series of measures in order to maintain their budgets balanced. This study investigates these measures with a focus on Florida, where the crash of the housing market has led to a severe erosion of the property tax base. The study addresses two interrelated questions. First, it analyzes the various strategies used by Florida’s local governments to cope with fiscal distress over the last three years. Second, it examines how these strategies differ conditional upon political environment and the amount of political cost that local public officials are willing to accept. Third, it estimates the effectiveness of these strategies by looking at the changes of local governments’ fiscal health. The analysis uses data from a survey sent out in 2011 to all 67 Florida counties and 133 municipalities with population of over 6,000. The study offers novel insights into the abilities of local governments to cope with fiscal difficulties and contributes to a better understanding of what strategies are most effective in a situation of increased fiscal distress.